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The Big Decision

You're the
proud owner of a self-storage facility and have been for several years. But now you have
reached a point in your life where you are contemplating the luxury of living off the
fruits of your hard work and investment. You are faced with the critical question: Do I or
don't I sell my facility? Each of us who participates in the ownership of a self-storage
facility will at some time be faced with this decision. How and when we approach it may
determine the highest value we will be able to receive for our operation.

So, when is the best time to sell? Is it when your property is running at high
occupancy? Is it when you have been unable to achieve high occupancy? Should you sell when
interest rates are low and financing more easy to obtain? Do you wait until all the new
competition around you has filled up? What will you do with the money from the sale? Do
you have a place and/or the ability to invest your money and avoid capital gains? These
among other questions all need to be considered when the time comes.

The first decision that needs to be made is whether or not to use a qualified broker.
In most cases, the answer is absolutely, positively, "yes." Note that I said
"qualified." This is important because there are a lot of brokers who know and
understand self-storage and, in many cases, that is the only property type they deal in.
They are by far the most qualified to find the right buyer for your property. (For more
information on this subject, refer to the November 1999 issue of Inside Self-Storage,
"Self-Storage and Brokers and Sales," by Maurice Pogoda. See also this month's
article by R.K. Kliebenstein and Neal Gussis.)

Potential Sales Outcomes

Now, let's talk about your property. Using the following as an example, you can insert
your own numbers and get a feel for where you may fall in terms of value. For this
discussion, we are going to assume that your property is 10 years old, has 50,000 square
feet of rentable space, has averaged 85 percent economic occupancy over the past year, and
averages $.50 per square foot in rent. You have a mortgage balance of $1 million at 9
percent interest, which has no prepayment penalties and is assumable to a qualified buyer.
The income from rents averages $21,250 per month or $255,000 per year. We would be able to
get some value from fees and other income but, to keep it simple, we are going to use only
rental income for this example. Let's also assume your expenses are $90,000 per year
including off-site management services. Thus, your net operating income is $165,000. At a
10 percent capitalization rate, your property would be worth $1.65 million. You have
agreed to pay your broker a 5 percent commission on the sale. Therefore, if you sold your
property for your asking price, you would receive the following:

Sale Price: $1.65 million

Less Commission: $82,500

Less Mortgage Balance: $1 million

Net Proceeds: $567,500

Without calculating the taxes you will have to pay (please see your accountant for that
information), you may end up with as little as half of the proceeds, or you may be able to
keep all of them.

Let's change the scenario a bit. Let's say you decide to hold on to your property for
another year, become aggressive in the marketing of your facility, and are able to
increase the economic occupancy to 92 percent and increase rental rates by 7 percent, only
spending an additional $5,000 in the process. Now you have a property collecting $298,080
per year in rent. Your expenses are $95,000; your net operating income is $203,080; and
your property is now worth $2,030,800 on a 10 percent capitalization rate. Let's look at
the new results:

Sale Price: $2,030,800

Less Commission: $101,540

Less Mortgage Balance: $1 million

Net Proceeds: $929,260

You can see that by increasing occupancy by 7 percent, increasing prices by 7 percent
and spending a little more money to get there, you can effectively increase your net
profit by $361,760--in addition to realizing the cash flow from an additional year of
operations.

Perhaps you're thinking, "But I've been unable to get my occupancy up and increase
my prices over the past year. How do I do that now?" There are several ways to
accomplish this:

Hire a management company to help you if you aren't already using one.

Give your managers an incentive-bonus program.

Work with an advertising agency.

Look at what has already been successful in your marketing efforts and duplicate it.

Consider a potential change in managers.

In other words, there are solutions. You just need to identify which one is best for
you.

The Information Package

Let's assume, for the sake of argument, that you have followed our second example and
are ready to sell. The following is some of the information you should expect to impart to
a potential buyer. I would put this package together before you see your broker:

Two years of financial history (balance sheet, income statement, tax return)

Ready to Sell

Once you
decide to sell, you'll need to have your property ready to change hands in a time period
that may take as long as the following:

Listing with a broker: one week to one month

Receiving and negotiating an offer: one to three months

Buyer due diligence: one to two months

Lender approval: one to two months after buyer acceptance of due diligence

Close: one month after lender approval

It is difficult in such limited space to go through all the steps and decisions
involved in selling your facility. This article is merely a summary of a few of the most
important considerations. In addition, you should read the industry trade journals, talk
to several brokers and speak to management companies that have been involved with buying
and selling self-storage facilities. You should also talk with your accountant and legal
counsel who have experience in these types of transactions as well as other owners who
have sold their facilities.

All in all, the decision to sell is a tough one. The more information you can gather on
the subject, the better off you will be at making that critical decision. Good luck.

Mel Holsinger is the executive vice president of Executive Self Storage Associates
Inc., with offices in Tucson, Ariz., and Denver. Over the past 13 years, both Mr.
Holsinger and company President Joe Niemczyk have assisted numerous clients in acquiring,
developing, managing and selling self-storage properties. The company currently manages
more than 50 self-storage properties throughout the country.